WASHINGTON -(Dow Jones)- A former Securities and Exchange Commission official who was faulted for blocking attempts to investigate jailed money manager R. Allen Stanford may be the target of federal criminal inquiry, SEC officials told lawmakers Friday.
Former Fort Worth Regional Office Enforcement Chief Spencer Barasch, after leaving the SEC, sought three times to represent Stanford as he fought the agency's case, and he briefly represented Stanford in 2006. The SEC made referrals to the Texas state bar and the Washington, D.C., bar as well as to criminal authorities to investigate the matter, SEC Enforcement Chief Robert Khuzami said in testimony before the U.S. House Financial Services Oversight Panel.
SEC Inspector General David Kotz told senators in a hearing last fall that he had spoken with the U.S. Justice Department about opening a probe into Barasch.
During the hearing, Rep. Randy Neugebauer (R., Texas) asked Khuzami if he knew Barasch had represented a client before the commission last Friday. "I was not aware of that," Khuzami said.
Neugebauer said that he doesn't believe the Texas state bar has received a referral regarding Barasch.
Lawmakers at the hearing, many of whom said they represent investors in $7 billion of bogus certificates of deposit issued by Stanford International Bank Ltd., expressed dismay that the SEC hadn't disciplined Barasch and other senior enforcement managers who allegedly stifled attempts to investigate the scheme.
"I don't think the agency is going to change much because I don't see anything where people are being held accountable and responsible," Rep. Steve Pearce (R., N.M.) said.
Khuzami and SEC Examination Chief Carlo di Florio testified the SEC couldn't punish people who have left the agency. Barasch left the SEC in 2005. He now leads the corporate governance and securities enforcement team at Dallas law firm Andrews Kurth LLP.
Khuzami noted that SEC ethics rules bar former employees from ever representing clients before the commission on matters in which they had been heavily involved when they worked there.
SEC spokesman John Nester said the SEC can't move to bar a lawyer from appearing before the commission in the absence of a finding in an SEC administrative hearing that the person acted improperly or unethically or if another court enters into a judgment against the person after being sued by the SEC. Lawyers who have been criminally convicted or disbarred also cannot appear before the commission.
Neugebauer asked whether the ethics rules prohibited former employees from advising clients on SEC matters even if they don't serve as the client's agent before the commission. Khuzami said he believed former employees could advise clients on their dealings with the SEC in some situations.
Neugebauer said the rules should be tightened.
Senior enforcement staff in the SEC's Fort Worth office failed for years to open an investigation into the Stanford bank's certificate of deposits despite numerous red flags, including the conclusions of SEC examiners stretching back to 1997 that they were bogus, the SEC's internal watchdog concluded in a March 2010 report.
Stanford has pleaded not guilty to criminal charges, detailed in a 14-count indictment, that he operated the fraud. He is now awaiting trial, set for September, in a federal medical facility in North Carolina where he is receiving psychiatric treatment.
The SEC will soon determine whether victims of the Ponzi scheme should be covered by federal insurance meant to compensate people missing securities held by brokerages, SEC Deputy Solicitor Michael Conley told lawmakers at the hearing.
The SEC will determine "in the next few weeks" whether the Securities Investor Protection Corp. is wrongly refusing coverage to victims of the fraud, he said. Victims of the fraud have argued for years they deserve compensation from SIPC for the amounts they invested, but SIPC found they aren't covered by federal insurance for failed brokerages because the certificates of deposit were being held at a bank.
Julie Preuitt, an employee of the Fort Worth office who used to manage examination staff, testified as part of a second panel of witnesses that she was still being retaliated against for raising concerns a few years ago about a new "quick-hit" approach to broker-dealer examinations being pushed by her superiors. Preuitt tried to bring the alleged Stanford fraud to the attention of investigators in her office several times, beginning in 1997. Her supervisory duties were removed after she confronted her superiors about the broker examinations.
Preuitt told lawmakers she still has little work and no supervisory duties and that her superiors continue to isolate her.
Di Florio praised Preuitt for doing a "terrific job" attempting to uncover Stanford's fraud. He said, "We are working closely with Ms. Preuitt right now to structure a portfolio of responsibilities that we think demonstrate her talents to the fullest potential," including exams "of national significance."
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